Diageo Fatal Flaw #2, Molasses Subsidy Payments

Molasses Subsidy Payments

5.2.1(a) For each Fiscal Year covered by this Agreement, beginning with the Fiscal Year ending September 30, 2012, the Molasses Subsidy Payment shall equal the amount to be paid to Diageo as an industry purchaser of molasses pursuant to the provisions of 33 Virgin Islands Code ~3036 (2007), which amount shall never be less than the difference between (a) 16 cents (U.S.) per gallon of molasses purchased by Diageo for use in the production of bulk rum at the Project and (2) the total cost per gallon of such molasses to Diageo.

The first part of the Molasses Subsidy Payments is fairly clear cut, It refers to section 3036 of Title 33 of the Virgin Islands Code. This is exactly the law as it applies to Cruzan Rum and has been evaluated and amended by the legislature four times. The law allows for the governor to conduct the studies and determine the amount to be subsidized. The base rate for the subsidy has been altered and increased over time as has a cap on total subsidies and the total amount paid per Gallon. There was even a cap on Total liability of the people in the event there was insufficient funds to pay Cruzan Rum.

So the Legislature always reserved the right to make adjustments. The law which was passed in 1974 was amended in 1980, twice in 1986 and finally in 2006. The second half of the law conflicts with the code (bold face) as the governor will no longer be able to set caps, or have the legislature or finance director review the rate, total amount spent or the cap.

It seems in American Law once contracts are signed no laws can be made to retroactively alter the contract, and in this case, once the Legislature ratifies the contract, the first paragraph becomes law. There are no more ifs, ands or buts. The total cost of all molasses turned into rum will be reimbursed without caps whether the rum goes to the United States and produces an increase in Rum Rebates or enters global markets with an unfair competative advantage which is sure to be noticed and challenged in court.

Oh well, it’s the Diageo Contract and the Legislature only has too choices, Take it or leave it, and let our children and grandchildren live with the benefits and consequences.

Is Kennith Mapp Dishonest or Worse?

I really don’t know if Kenneth Mapp is as honest as George Washington was supposed to have been but I know he has been called a liar for claiming the real debt is $250 million, stating the money can be used for land acquisition, soft costs, working capital and insurance and that even more money may be required. But what the heck, you can just go to page 21 of the contract and read the truth yourself. Read it and weep.

6.1.3 It is currently anticipated that the Issuer will issue the following series of Diageo Project Bonds, payable from a lien on all Incremental Cover Over Revenues:

(a) Approximately US $250 million Tax-Exempt Diageo Project Bonds, to used for Project and Project Site acquisition, development, construction and soft costs, working capital funding, capitalized interest, reserves and costs of issuance:

(b) Additional Diageo Project Bonds to be issued as necessary for Project completion or expansion purposes as determined by the Parties;

Marketing Fund Rebuttals

The only response that I heard to Fatal flaw #1 on the use of Marketing funds to promote non Virgin Islands rums was that that was not the intent , Kennith Mapp read it wrong and is engaging in sour grapes and Bert Bryan is nuts. Well Bert is probably nuts, Kenny is probably a little gleeful but unfortunately, they are both correct. Regardless of the intent of the Government to allocate Marketing Funds to promote the rums from the new plant, the analysis shows that they can use the Rum Rebate money to promote their other products made in the Caribbean to the detriment of Puerto Rico and the Virgin Islands.

The other defense is that the Diageo people are honorable and would never do such a thing. Well if the are so damned honorable, why not remove the offending language and revert to the far simpler and restricted form which says that the rum rebate monies should only be spent on Captain Morgan and other products made in the plant. Quite Simply,

Diageo’s Marketing Activities shall be in furtherance of its promotion of the Captain Morgan rum brand or any other products utilizing the bulk rum produced by the Project for sale in the United States.

There is simply no excuse for any other alternate form.

Diageo’s Virgin Islands Deal, Fatal Flaw #1

A fatal flaw is an imperfection that will kill you. A person can have a weak heart, ruptured spleen, be in kidney failure and have a rotted liver and it won’t do much good to address just one of the fatal flaws because the others will still kill you. Perhaps the most dangerous fatal flaw to the territory is in the Marketing Activities and Support Payments Described in the contract between Diageo and the Virgin Islands.

On page 17 under section 5.1.1 Marketing Activities

5.1.1(b)Diageo’s Marketing Activities shall be in furtherance of its promotion of the Captain Morgan rum brand (or any other products utilizing the bulk rum produced by the Project for sale in the United States), and when advisable from a marketing viewpoint “Virgin Islands Rums” or “Caribbean Rums”, in the United States.

5.1.1.(c)Diageo shall regularly report to the Government on the content and effectiveness of the Marketing Activities performed hereunder. The Government shall have the right, at reasonable times and upon reasonable prior notice, to meet with the representatives of Diageo to discuss the Marketing Activities and progress in promoting both the Captain Morgan brand and Virgin Islands Rum or Caribbean Rums generally.

Now the first paragraph is confusing and seems to imply that its rum made in the facility but lets break it down into a simpler form.

Let “CAPTAIN” be the Captain Morgan rum Brand (or any other products utilizing the bulk rum produced by the project for sale in the United States)

Let “CRUZAN be Virgin Islands Rums

Let “MYERS” be Caribbean Rums

Now let’s rewrite the paragraphs in far simpler forms:

Diageo’s Marketing Activities shall be in furtherance of its promotion of CAPTAIN, and when advisable from a marketing viewpoint “CRUZAN” or “MYERS”, in the United States.

The Government shall have the right, at reasonable times and upon reasonable prior notice, to meet with the representatives of Diageo to discuss the Marketing Activities and progress in promoting both the Captain Morgan brand and CRUZAN or MYERS generally.

Clearly the money can be spent on promoting any product from the factory and “CRUZAN or MYERS” but when reporting to the government they don’t necessarily have to document expenditures on MYERS. I don’t see how a court could rule in any other manner.

One reason they might want to do this is when visiting trade shows, they might carry Captain Morgan Brands and their other minor rum brands and have the Captain Morgan Brand pay for it.

Another reason might be that the Government is giving them too much money to spend on Captain Morgan alone. After all in 2003, they only spent $15 million on media advertising to grow about 10% while Bacardi is spending $60 million a year to defend their market share which is declining anyway. Clearly, $89 million is just too much money to spend on advertising a hot brand like Captain Morgan and the cash reserves could be used to promote another Virgin Islands brand or Myers Jamaican rum which is the fastest growing rum in America and obviously gaining market share at the expense of Cruzan Rum and Puerto Rico’s Ronrico. These funds will accelerate the direct assault on the financial stability of the Virgin Islands and Puerto Rico and be paid for by the people of the Virgin Islands. Now that’s sick.

Unbelievably we could finance an even sicker move by Diageo which owns Pampero made in Venezuela which has a better and truer marketing story for a premium rum than Cruzan or even the fictional Captain Morgan. The last time I checked, Venezuela was a Caribbean Nation and they could use their $89 million of marketing money to promote Pampero and increase employment and taxes for the Government of Hugo Chavez.

Now when Congress figures out that the people of the Virgin Islands are using rum rebates to assist the government of Hugo Chavez and destroying the financial stability of Puerto Rico and themselves, I doubt that even Donna Christiansen can keep the Rum rebates flowing to the Islands during a period of National recession.

I don’t want to believe that Diageo really believes that Virgin Islanders should pay for the development of the Myers and Pompero Brands and jeopardize the whole rum rebate program and impoverish the Virgin Islands. But it’s up to them to alter the paragraph as the Governor has already signed off on it, the Delegate has approved it and the Senate will rubber stamp it. It may have been their intent to say that rum made here and packaged in Bermuda as Caribbean rum could use funds from the rum rebates to promote the work done in Bermuda but it does not say that. Even in that case, I’m not sure Congress would be happy about using American funds to promote offshore jobs. Whatever , there intern, they can clarify it in the hearing and add an amendment which reflects the change. Something very simple like:

Diageo’s Marketing Activities shall be in furtherance of its promotion of the Captain Morgan rum brand or any other products utilizing the bulk rum produced by the Project for sale in the United States.

This would cover every product produced in St. Croix regardless of what it was called in the market.

Islanders should thank Kennith Mapp for taking the time to read the document and bringing up all of the fatal flaws as a topic of discussion. If one fatal flaw is not enough to kill this deal there are more to come.

Juan Luis & the Diageo Deal

Anybody who knows Juan Luis, knows he is still concerned with the Virgin Islands, her people and problems. As a retired Governor of the Virgin Islands serving 11 years, you might expect him to be living in the past but that never happens unless he is applying past experiences to current issues. He listens to all opinions prior to expressing his opinion but once he starts on what he has identified as the best path, you just can’t stop him.

It is interesting to watch him evaluate the Diageo Deal. He has not yet taken a strong position either publicly or privately but the process he is using to evaluate the deal exemplifies his leaderships style. Governor Luis always claimed that every project should be evaluated in the context of three criteria while reaming aware that the government should try to be doing more with less. The criteria are

1. Is it legal and ethical?

2. Is it necessary or does it benefit the people?

3. Can the Territory afford the project assuming all the expenses and risks?

Now anybody short of the truly brain dead, has to recognize that he Diageo Deal is legal and has huge potential benefits and that is not a concern of Governor Luis, any of his former advisers or current friends. His concern is the price we the people of the Virgin Islands, our children, grand-children and in thirty years our great grand-children will have to pay including all hidden costs and can we afford the worst case scenario.

When Juan Luis was Governor, one aid was Elmo D. Roebuck, one of the most brilliant people to serve as Finance Chair in the Senate and Kenneth Mapp who was his bodyguard/driver who later became a brilliant financial mind and actually went to Harvard for an executive MPA without graduating from college. He spent a lot of time listening to his two old financial advisers and the fact is he is beginning to worry about the long term potential liability of the deal which in the worst case could bankrupt the territory.

Kenneth Mapp discussed all his reservations at 2 PM on Saturday but news reports on the deal and an analysis of it are non-existent. The most amazing items discussed are what negotiators call “throwaway” items. These items are so stupid and absurd that the party that asks for them really expects them to be discarded because nobody in their right mind who was honest really expects them to be included in the final package. They are there as a negotiating point that you expect will be discarded and not an integral part of what you really want. I have friends who include the most absurd crap in a contract and are utterly amazed when they occasionally get what the ask for.

On his own Kennith Mapp discovered three trully stupid throwaway items that should have been eliminated before the draft became public. They are so unethical that they might have been included to obscure the discussion of the amount of the bond, the impact on our revenues and whether the Diageo Deal is worth the risk. There is no other reason a Virgin Islander (Native or Not) would have allowed these three contract points without a major bribe or engaging in overwhelming stupidity. Mr. Mapp could not accept that anyone had actually taken a bribe for this sweetheart contact so that means the inclusion of truly dumb throwaway items has to be caused by overwhelming stupidity or to obscure real discussion of the risk.

One good point about a contract this bad is that no one from Puerto Rico will be knocking at the door to offer the same or a similar contract to Diageo.

The throwaway items be discussed separately.

Nationalize Captain Morgan?

There are problems with living in the Caribbean – the hot sun, too much rum and easy living for those in a position of power.  Thus, it is not uncommon to observe the early onset of dementia and many wander the streets with delusions of grandeur.  Unfortunately it is sometimes difficult to tell the difference between the homeless mentally ill and politicians seeking reelection.

One thing that is great about big new projects is that they always bring out the worst in our environmentalists and politicians. Everyone is misreading facts or creating lies and then forming opinions based on these falsehoods while others are seeking the deadly blow that will kill the project for whatever hidden agenda they might have.

Perhaps my favorite take-out on the Diageo Deal is that we are “entitled” to a piece of the Captain Morgan brand for the privilege of letting them generate a $100 million in taxes each year, providing 40 jobs and bringing infinite publicity to the Virgin Islands.

Lets start with basics.  Bacardi has been in the US for over a hundred years and they are the number one rum in America and the third largest distilled spirit of any type in the country.  Diageo purchased the Captain Morgan Brand from Seagrams and in 1984 introduced in to the United States.  The Virgin Islands government did not assist Diageo with the purchase of the brand name or the expense of a National Launch.   Over the past several years, Diageo has spent hundreds of millions promoting the brand and it is so successful that it is very likely to become more popular than Bacardi.  Captain Morgan is extremely successful and got that way without the assistance or financial support of the Virgin Islands government.

Just like other third world dictators (Chavez and Castro), some Senators see profitable companies that they did nothing to create and want to nationalize them for the good of the people “dem.”  Suggesting a piece of the pie or a “partnership” for a Billion Dollar business that we did nothing to create is promoting theft or nationalization. Now in St. Croix, revolutionary socialist thoughts do not necessarily stop you from getting elected. Fortunately for the people of the Virgin Islands and generating new revenue streams to get us through the future energy crunch and pay down the GERS debt, the St. Thomas Senators get elected on maintaining the status quo and not rocking the boat.

The banal debate on partnerships and jobs for natives by the publicity hounds serves to obscure the fact the the contract is a major commitment by the people of the Virgin Islands and the economic analysis must be exact. Behind the scenes some of the best economic minds have done an exacting economic analysis and Kennith Mapp will be bringing his analysis to the public on Saturday (today) at 2PM on 97X. His more exacting methodology of actually reading the Diageo documents and grasping the meaning of the Diageo Contract has identified several serious and Deadly flaws which may be the Achilles heal of the Diageo Deal and have nothing to do with the knee jerk rejection by Springer and Bryan and proponents of nationalization.
Everybody concerned with the economic well being of the territory should listen to the one hour program including the Governor and all Senators.   Hopefully the Governor will listen to the financial analysis and cancel the Diageo hearing and thus gain enough time to renegotiate and alleviate the financial risks identified by Mr. Mapp. To throw the Diageo People into a den of lions while the contract is indeed flawed, is lunacy.

Dangers for Diageo and Cruzan Rum!

Champagne and Bordeaux wine are produced in France, Liebfraumlich is produced in Germany and Chianti is Italian. Where American companies try to use these words, the European Union blocks their imports and protests to the US Government.

So where can Cruzan Rum be made? The answer is anywhere in the world. The answer will be different for Diageo. After Diageo builds builds the distillery which is paid for by future rum excise taxes from the project, they must make all Captain Morgan Rum on St. Croix. If they default and there are no rum excise revenues, they pay for the dormant refinery themselves.

About three years ago Cruzan Rum was taken over by Todd Hunter and the name of the whole organization changed to Cruzan Rum. Operations by the company included vinegar and cooking wine manufacturing, bottling and sales. Of course they wanted to grow the Cruzan brand so the approached the government for marketing funds and got $24 million and a future percentage of rum excise taxes on branded products to expand their sales. Their threat was that Cruzan rum could be made any place in the world. There was no special molasses or water from St. Croix, it was the recipe and technology that made the rum so good and that could be moved anywhere including tax free areas in America

This was not the first time that a distillery threatened to move. Brugal had requested government assistance to repair the government building in Frederiksted which they rented. When the government said no, they moved the operation. While you can still get Brugal rum in every bar in St. Croix, it is no longer made here.

It would appear that Cruzan is completely capable of taking care of themselves with regard to the local government including renegotiating their agreements with the government and threatening to move elsewhere. Diageo has nothing at all to do with the contract between the Government and Cruzan Rum so to question Diageo on the issue is borderline retardation and a failure to connect the dots. If it was a lapse in judgment that gave Diageo a better deal, than only the government negotiators should be challenged because it is the legal obligation of Diageo to get the best deal they can for stockholders.

Now where Cruzan is in danger is not from the Diageo Deal but from global politics. Bacardi is the number one rum in the world and is absolutely hated by the Cuban government for one of their owners purchasing a plane to bomb Cuba’s refineries and working with the CIA prior to the Kennedy assignation to kill Raul and Fidel Castro and Che Guevara. They pissed off the Cuban government a little more when they started marketing Havana Club Rum in the United states. Seems that Havana Club is a 50-50 brand of the Cuban Government and Pernod Ricard and is distributed all over the world as a premium brand for up to $1200 per bottle – This stuff is supposed to be really good. Now that Pernod Ricard owns Cruzan Rum, its hard to conceive that they would expand global markets and kill their own premium Havana Club brand which sells for a lot more and is already well established globally. With increasing distribution costs in the American market from fuel costs, it is reasonable to assume that Crucian Rum will be absorbed into the Pernod Ricard distribution system and become one more brand in the line up.

It’s a basic fact that people try new alcoholic products because they are on the shelf placed there by a focused distribution system that works for the brand or are pulled through the system by a massive promotional campaign. In the absence of captive distribution, Cruzan will need a stronger marketing campaign. This will only occur if Pernod Ricard allows it.

Fortunately for the short term, Pernod Ricard has no strong American Rum Brands so should continue distribution and marketing to the American Market while keeping it out of the global market. If relations with Cuba are normalized, the future of Cruzan would be jeopardized as Cuban Havana Club entered the market. This analysis is about opposite of what the governor was promised but makes more sense.

Meanwhile Diageo is the 800 pound gorilla in the rum industry. In the 4 years between 2002 and 2006 they have grown the Meyers rum brand 83% and the much larger Captain Morgan Brand by 44%. Over the same period Ronrico and Castillo, grew by only 1%, Cruzan and Bacardi were in the middle with growth of 8 and 12% respectively in the period. It won’t be long before Captain Morgan passes Bacardi as the number one rum in America and for good reason. It is far easier to sell the image of a swashbuckling pirate than to sell the image of a nasty bat (Bacardi) or to market brands with no image at all.

If I were a senator, I would jump at the Diageo deal and then spend some serious time and mental effort on figuring out what the government can do to insure the future of Cruzan Rum in St. Croix. Perhaps we should have a banal contest like we did for choosing the design on the back of the quarter. At worst it will do no harm and at best we might find a symbol that tells a story for Cruzan Rum that is better than a guano producing bat but probably not as good as a swashbuckling pirate.

Your Constitutional Right to Culture – Too good To be True!

“Article XI Culture

Section 1. Cultural Development

No law may be passed which abridges the preservation and development of Virgin Islands culture, language, traditions or customs.”

While I am very critical about much of the crap being produced by the Constitutional Zoo, it’s inevitable that even wild animals typing randomly on typewriters will eventually come up with words of wisdom. I never moved to Paradise to change it, but I have noticed many laws which have truly altered our culture and not necessarily for the better. One custom which I truly miss was the habit of drivers randomly stopping in traffic to chat with friends. Today you might be held up but tomorrow, you might be the one blocking traffic – no big deal. Now blocking traffic is against the law.

Now the really big legislative initiative which totally altered our culture was developing the franchises for Cable TV. In the early eighties, Crucians had impeccable manners and you rarely heard perfectly enunciated profanity on the streets or in business. You were more likely to hear an angry person say “cheese and bread” on the street than to hear a scream of “Jesus Christ” outside of Church. Other than talking loudly while playing Dominoes, most cultural traditions could be described as quaint.

Now with the advent of Cable TV including MTV and BET (Black Exploitation Television) came the introduction to Gangster Rap, and some very low community standards for speech and dress. Within a decade of 1986, the whole value system shifted to sex, guns and violence. Marijuana and rum had always been a part of life but heroin, crack, and cocaine begin to dominate the drug scene and turf wars escalated. Nothing has altered the culture of the Virgin Islands more than Cable TV.

It will be difficult to abolish Cable TV and roll back the clock but there are still cultural traditions which need to be defended. After all, it’s part of the culture to have 26 holidays a year for government employees and for the Governor to give additional time off for food sales, festival and carnival. Abolishing this paid time off would be altering the culture and tradition of the islands. Defending the right to not work based on tradition is consistent with the constitutionally guaranteed right to sloth.

Your Constitutional Right to Sloth!

I just love www.dictionary.com where I went to find the precise meaning of sloth and of course they give you several choices:

1. Habitual disinclination to exertion; indolence; laziness.

2. Aversion to work or exertion; laziness; indolence.
3. A disinclination to work or exert yourself

Pretty much all the meanings are the same and a constitution section that develops the right to sloth means that a person has the right to develop work avoidance skills.

If you talk to business owners, the best time to start training young people to work is about 12. Beyond that age, the child starts to become interested in sex and they believe they are full grown adults who know it all. If you don’t teach them a work ethic by the time they are 16, they are simply unemployable. I know I started working in manual labor at age 5 mowing neighbors lawns and in a clerical position by age 12. I was also still driving farm equipment at age 12 because it paid more than clerical work in the sumer. I have friends and acquaintances who are contractors in the Virgin Islands who have trained their children (under 10) to operate fork lifts so they could work with daddy. All of our reliable babysitters were younger than 16 because they didn’t yet have a social life.

This working with young children crosses all ethnic lines including West Indian, Arab, Hispanic and Continental. The only common denominator is that the most adults who believe in teaching children to work at an early age are highly successful self employed business people. I expected my children to work in my businesses from the time they were about six and both worked for other people from the time they were about 12. I have observed young people who did web designs and started at age 12-15 doing this work for minimum wage. What they learned carried them to the best colleges including Yale and RIT where they graduated. Not bad for local kids who learned to work.

The best thing that ever happened to St. Croix was the unpaid baggers at Plaza Extra. These young people made good money on tips and learned about the work environment. Plaza listened to all complaints and modified the children’s behavior so they would be employable in the future. Swearing in front of customers was cause for loss of your job as was anything else which damaged the reputation of Plaza such as fighting or gambling on site.

Hell, even the Department of Education has a mandate for 500 hours of community service before a person can graduate. Of course, most of that is unpaid involuntary servitude for a government agency so that hardly qualifies for developing a work ethic.

So when we talk of crap as the output from the Constitutional Zoo, it is not surprising to see under ARTICLE X, YOUTH the following:

Section 1.(a) The employment of children under the age of sixteen in any occupation is prohibited.

That is an absolute and final decision which should have remained with the Department of Labor and depend on matching the individual capabilities and desires of the child to the job they are trying to do. For this section alone, I would vote against the constitution for interfering with my family values.

The Diageo Deal!

I married a beautiful woman because I had a positive self image, and assertiveness to pursue a beautiful woman. Now many men don’t want to pursue a beautiful, intelligent wife because they fear rejection so they settle for a lot less. Really low self esteem men with low intelligence don’t have the ability to appreciate any woman at all, so just demean all woman and try to tear them apart by seeking out every petty flaw.

What brings this to mind is the proposed Diageo Rum Factory on St. Croix designed to produce Captain Morgan Rum. Now this is like being approached by the most beautiful woman in the world and trying to find reasons to reject her. I’m somewhat amazed that Diageo wants to court us at all. This is the number one beverage company in the whole world with stock exchange listings on the London Stock Exchange and the New York Stock Exchange. They are so big, they are part of the FTSE 100 which is the listing of the top 100 premier stocks on the London exchange. The paint themselves as a responsible corporate citizen promoting environmental responsibility,responsible drinking and corporate charity. Diageo has already announced their intent to come to St. Croix to the world.

Unlike local politicians (Springer and Bryan) and fly by night hotel ventures, they are compelled to tell the truth. They say this is a 30 year pack, and a $150,000,000 investment ($165,000,000 with construction financing) then it is. They tell there stockholders that the plant is environmentally sound then it must be. What most negative people simply can’t comprehend is that this is not a $100,000,000 return to the government over 30 years but a $100 million a year for 30 years or a $3 Billion return on a $165 million. Hell, I’d even give Bert Bryan $165,000, if he signed a legally binding contract to give me back $100,000 a year for 30 years binding on his heirs and estate. Maybe Michael Springer would jump at the deal to finance his Senate Campaign with the hopes of being able to find sources to repay the $100,000 each year for 30 years.

Come on guys, get real, it would appear that some people are just too full of hate to recognize a beautiful woman or a beautiful deal when it is placed right in front of them.

Check out Diageo on the web. While you’re at it check out their Captain Morgan Web site. This highly promioted product could have so many tie in’s with Caribbean Pirates and the Virgin Islands given just half a chance. Just imagine what it could do for tourism in all of the islands. Diageo is the real deal and already has there own rum factories in Australia (The new home of Mt. Eagle) and Venezuela (the home of Hugo Chavez). When you consider transportation costs and unstable government, the Virgin Islands looks good, but not good enough to put up with a whole lot of crap from idiots.